an economics scrapbook

The face of the river, in time, became a wonderful book . . . which told its mind to me without reserve, delivering its most cherished secrets as clearly as if it had uttered them with a voice.
-- Mark Twain

Last week Spanish Prime Minister, Mariano Rajoy, warned “Spain is facing an economic situation of extreme difficulty – I repeat: of extreme difficulty – and anyone who doesn’t understand that is fooling themselves.” When the Prime Minister is willing to admit the state of affairs is extreme, we’d better take heed.

As usual, here in the US we see little economic reality addressed in the evening news and have heard almost nothing about how very close to the economic abyss Spain is teetering. The situation in that country is dire. Spain is in a serious and deepening financial depression. Unemployment is up for the eighth consecutive month, as it approaches the 25% mark. The economy is contracting, with falling revenues and industrial output. The country has been wracked with strikes and massive violent protests as austerity measures cripple the financial stability of the populace.

Unfortunately, more devastation is to come. I ran across some amazing statistics from Mike Shedlock last week that show the majority of the Spanish budget is dedicated to pensions, unemployment and interest… 57%, to be precise. Amazing… and totally unsustainable. Especially when we consider both unemployment and interest rates are only heading higher. There are going to be major cuts to pensions. What will happen then? The people have already taken to the streets. We are going to see more protests and more violence. The economy cannot sustain further cuts without creating worse financial damage, as well as serious sociopolitical consequences.

Another shocking illustration of Spain’s proximity to disaster shows up in the story of its bond market. Last week an auction of 5-year treasuries sold a billion euros short of target. Yields were off a full percentage point on a month-over-month basis. While the previous month’s auction put the Spanish bond rate at 3.3%, this month’s auction saw bond yields increase to 4.8%. This is after the LTRO 2 (second Long Term Repo Operation by the European Central Bank) injection of an estimated one trillion euros. Five years ago we’d have expected that kind of money to fund a 2 to 3 year new business cycle, but today it just disappeared over the course of a few months into the massive financial black hole Spain has become. Banks will likely soon find themselves underwater on Spanish bonds they bought with bailout money that was given to them in order to bail them out from prior bad investment decisions. Of course that will soon put them in need of… another bailout! As we look at multiple layers of failed bailouts, we have to ask if the emperor is wearing any clothes.

Yet, another bailout seems inevitable because at the base level we are talking about peoples’ lives and survival. Spain will have to seek international funding. The people cannot sustain anymore austerity cuts without severe and even lethal consequences. Which brings up another piece of clear and validating evidence the country is indeed in deep trouble: the official denial of such trouble. The Spanish Economy Minister just released this official statement: “any suggestion that Madrid needs emergency international funds is absurd.” There is no better indication of real trouble than an official denial by government that such trouble exists. The Ministry of Truth has declared there is nothing to worry about, so you’d better worry. The Econ Minister probably should have met with the Prime Minister before going on record like that, just to get their story straight, ya’ know? Either way, Spain is going to implode.